FMCGs, auto cos put a stop to price revisions to protect margins

It may not be easy to get the best things cheap now. If corporates and market analysts are to be believed, the phase of dramatic cut in prices of goods and services is over.

FMCG companies like Hindustan Lever, Colgate have already raised prices of their key products. Auto companies are also ensuring that a price war does not take a toll on their margins.

Makers of FMCG products, consumer durables and automobiles have over the past few years boosted demand by cutting prices, either directly or by way of discounts. But that trend seems to be weakening.

While input prices have softened over the past month they had been increasing for several months prior to that. This and hardening interest rates are making it difficult for companies to effect any further cuts in products.

This is true of a wide range of industries. In case of IT services, there is no more pressure on billing rates. In fact, if Infosys Technologies chief financial officer Mohandas Pai is to be believed, billing rates have stabilised and are moving upwards.

While nobody is sticking his or her neck out to say that corporates have got back their pricing power, there is a consensus that the phase of a downward trend in prices of products and services is over.

“Our view is that pricing is stable with an upward bias. The phase of price correction is over for now,” Infosys CFO Mohandas Pai said. Market participants endorse the view.

“We do not foresee any significant (downward) price corrections any further. However, with lower import duties, competitive pressure remains,” Vinay Kulkarni, equities fund manager at UTI Mutual Fund said. Even in sectors like cement and other commodities, corporates are witnessing a sense of price stability.

“In the near term we do not expect sharp price hikes in input cost and hence there could be a period of some price stability ahead,” P Shankar Raman , VP-finanace, Larsen & Toubro told ET.

However, he says that most of the price rise witnessed in the markets has been driven largely by a sharp increase in input costs. “I do not think that businesses have witnessed improved realisations except in areas where there is a strong demand growth,” Mr Raman added. Demand is expected to be the key driver going forward. Many believe that over the next few weeks, this is likely to be a key theme.

A significant indicator of a rise in demand is the data on India's merchandise trade deficit. While exports rose 17.2 per cent year on year in April '05, imports surged 51 per cent. This was largely driven by higher imports of crude and a strong rebound in non-oil imports due to demand, according to estimates from brokerage JP Morgan.

The trade deficit widened to a record high of $3.85billion in April, the first month of fiscal '05-06.

“The deficit in April was substantially larger than the monthly average of $2.2billion in '04-05, prices will partly offset the positive impact of lower global crude oil prices,” JP Morgan states in a note. Mr Pai of Infosys Technologies believes that those who innovate and come out with new products will enjoy greater pricing power.

The last few years have demonstrated that during adverse times India Inc gets tougher and can get through in good shape. “I think for India Inc pricing is going to be tight going forward because there is enhanced competition, tariffs are coming down, China is a great competitor and greater efficiencies are coming in the market place,” Mr Pai added.

Mr Raman sees competition as a counter balance to run away pricing possibilities.